Waverton Asia managers forced to abandon growth strategy in face of crisis

The eurozone debt crisis has forced the managers of the Waverton Asia Pacific fund to abandon their growth strategy in favour of defensive stocks after a dire period for performance.

J O Hambro Investment Management (JOHIM) managers Edward Stileman and Alan Gibbs sold out of many of their growth plays in mid August in favour of more defensive stocks. They expect to remain in these positions until a "market-clearing event" happens in Europe.

Stileman said: "We need a whale to clear the markets - we have had the dolphin with MF Global [the brokerage firm that filed for bankruptcy this month] but we need a whale like Lehman Brothers to see the bottom of the market."

The manager, who works alongside Alan Gibbs, admitted a slight mistake had been made on the fund but they are confident with the changes to the portfolio.

"We have been concerned about Europe for some time and we chose to mainly invest in companies displaying extreme levels of value, high quality business with good earnings visibility.

"We thought these would be defensive positions, but normal investment styles this year have been turned on their head. The value and quality approach has not been working, and August was tough for us."

The fund is at the bottom of the 102-strong Morningstar Asia Pacific ex Japan Equity peer group, falling 22.93% compared to the average fall of 10.44% over the past year.

"We quickly rotated into defensives in mid August and we are entirely comfortable with the portfolio now.

"Although the markets have rallied, we are not out of the woods in Europe, and there is potential for a shock or ‘euroquake'. Until we see that we find it difficult to believe markets will move up meaningfully."

In Asia, Stileman said fundamentals remain strong, especially since Chinese inflation has begun to drop off, giving the central bank flexibility to loosen monetary policy.

However, he said this may not be as soon as some might expect.
"In 2008, when exports fell off a cliff, the Chinese central bank stimulated aggressively, probably a bit too much. It has spent the last two years trying to soak up that money.

"Now rates are back to more normal levels I do not think it will act as soon as people would like, for fear of overstimulating again. We might see some ugly economic figures first."

The managers added they will "undoubtedly" rotate back into growth stocks, and are taking advantage of opportunities through the volatility.

"Our normal habitat is growth stocks and we are buying some growth companies that are more cyclical where valuations are discounting horrendous scenarios. But until we see a real resolution we are happy to stick with the defensive positions," Stileman added.